Turmoil in Financial Markets: decision-making bias in financial trades

Coaching Psychology topics of interest to members and guests.
WARNING: Posts here can be read by anyone on the Internet
silmcoach
Site Admin
Posts: 239
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: over and out

Post by silmcoach »

As the Sydney ASX All Ordinaries market virtually collapses, losing nearly 10% by mid afternoon (Aus time), it's more than likely European, then the U.S. markets will bomb later today. I think it's time to bring this exercise to a close.

My conclusion is that Kahneman's hold-on-to-winners strategy is not a good strategy for all circumstances. I think you ignore gut feeling at your peril.

My gut feeling (as argued here) was to cash in when the markets peaked in February because prices did not reflect economic fundamentals. But I wanted to remain the objective experimenter testing the theory. In that rational frame of mind it seemed reasonable to buy back funds for less than I sold them as markets dipped. The problem was they kept on dipping. Now I'm spent up the markets continue to fall. All I can do now is hope that eventually the markets recover (could be a few years!).

Had I listened to my gut feeling I would have secured my gains selling all my fund holdings, held cash, waited for the worst of the crisis to be over, then reinvested in the final dip range.

So, we do have a slow system 1, and a fast system 2, but we have to remain flexible and alert to risk, ready to respond in a flash when necessary.

RESULTS:

Stocks sold November 2019 £1,944 (gain £250 including cash dividends). Had I held on to these winners I would have lost £273 on them by 8 a.m. today.
Remaining stocks held since November 2019 £1,304, current loss £189.
Stocks purchased during recent market falls to date £4,037

Total current holdings £5,341 showing a loss on paper of £381.

Had I held onto all my winners (instead of selling some) the total loss this morning on £3,248 invested would have been - £462
But by selling winners for a £250 gain, then buying them back at a lower price, (and increasing my holdings to £5,341), my total loss of £381 is reduced by the £250 gain, so a net loss of £131.

I am therefore £331 better off by having sold winners.

CONCLUSION: Selling winners was a better strategy than hanging on to winners.
[Caveat: Stocks look like falling another 10% today, so these figures are provisional]
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 239
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: Update Friday 13th

Post by silmcoach »

Update: Close of business Thurs 12th.

Markets did fall 10%

Stocks sold November 2019 £1,944 (gain £250 including cash dividends). Had I held on to these winners I would have lost -£387 on them by 8 a.m. today.
Remaining stocks held since November 2019 £1,304, current loss -£261.32.
Stocks purchased during recent market falls to date £4,037

Total current holdings £5,099 showing a loss on paper of £623.

Had I held onto all my winners (instead of selling some) the total loss this morning on £3,248 invested would have been - £648
But by selling winners for a £250 gain, then buying them back at a lower price, (and increasing my holdings to £5,341), my loss of £623 is reduced by the £250 gain, so a net loss of £373.

I am still £275 better off by having sold winners, then buying back when the price fell.

Believe it or not I did place three fund buy orders of £100 each for noon valuation today, mad or what? Topping up my three best winning funds while prices are low. My gut feeling (uh, uh) is that we will survive the coronavirus pandemic and the markets will rebound. There was a bit of a bounce on opening after yesterday's greatest fall since 1987, but some commentators say it's a dead cat bounce, and that the markets will continue to fall. So, all I can do is hope.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 239
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: time to reflect

Post by silmcoach »

Early to bed last night, so early to rise.

Is this the end of the world as we know it? So go the words of the song.

Hopefully not, but certainly challenging times ahead. Kahneman's hold-on-to-winners strategy is intended to override an innate aversion to loss. In this experiment that may prove to be an expensive mistake.

By religiously sticking to the logical strategy I reasoned buy back into the market as prices fell. Shutting off my fast system two and the fear response blinded me to the fact that I was actually risking losing my entire investment.

That fear is apparent in my earlier posts, but was dissipated when I forced myself to remain the objective experimenter.

The lesson learned is that you should always remain flexible, ready to adapt to change. There's a good reason for having a slow system one and a fast system two, ready to respond in a flash. I should have listened, sold my entire stock holding as my gut told me, and waited longer for the dip to bottom out. It's easy to be wise after the event. The only resource left is patience. The markets will recover in time.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 239
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: Black Monday - 2 months on

Post by silmcoach »

Well, the markets crashed on March 23rd., what I call, Black Monday (I think that label's been used before)!

On paper my loss was £1,187 (less the £250 I'd banked) on £6,029 invested, so a net loss of £937. It's been painful following the markets, but at least they have steadily gained such that my current loss this Bank Holiday weekend stands at £400.89p, less the £250 banked, which is a net loss of around £150, which I guess isn't too bad.

Had I not bought back in chasing dividends and just put the lot in the Dow I would have been up 18% = £1,085 as well as the £250. Hindsight is a wonderful thing, and I did actually consider doing just that, but hey ho, I didn't, so that's that.

Right, brush off the dust, take stock of how things are now. and decide how to proceed. I know it's sad, Bank Holiday weekend thinking about money, but I promise you I will get out into the New Forest later for a nice long walk. I just happened to set up a new computer this morning and wanted to set up a redirect on coachpsy.com to https as all my knowledge base files point to http. That done, curiosity got me looking at coachpsy.com again. and motivated me to post this reflection.

Now you might find this a bit bonkers, but I had a couple of dreams last week. The first was my swimming out in a rough sea, and as I rose on the crest of a big wave I could see in the distance a tsunami headed to shore. The second dream, a couple nights later, was about a chap on a motorbike going hell for leather to get out of the City of London. Now whether you believe in premonitions, or think the unconscious was processing my fear, I can't help but be influenced by these dreams which were more vivid than usual.

My inclination is to sell everything. I have no fear about missing out on rising stock prices. The continuous rise of the markets over the last 10 years or so is a thing of the past. I suspect we have 10 years of volatility in the markets ahead of us, so this calls for a new strategy. Contrary to the "hold-on-to-winners" strategy I am going to be dipping a toe into the markets and out again quick, satisfied to make 2-3%. The reason is that even my Cash ISA is now only paying 0.01% interest, so I thought I might as well transfer those minimal funds (cash) into a Stocks and Shares ISA.

Now the interesting thing is that because there is no 25% contribution from the government I no longer have that "safety" margin. Even when I was £1,100 down on the SIPP it wasn't actually a net loss because that loss was set off against the 3 x £720 government contributions. So the SIPP continued to show a profit in terms of net contributions. Now with the ISA, a pound loss is an actual loss, and even though I only put £100 into each of three funds (with ex-dividend dates of 31 May and 6 June) it hurt when two of the funds rose 3% before the valuation point, then promptly lost 2% the next day. That's a lesson learned! So, I will sell after the ex-dividend dates, as long as I am 2-3% up, or even 1% up on the dividend, which if I then hang on to the cash for a year is still a far better return than the Cash ISA of 0.01%; And if they do introduce negative interest rates, well ...

As to the SIPP, I will apply the same strategy to funds in profit with the earliest ex-dividend dates. Those funds currently showing a 15-20% loss I will hold, content to receive the regular dividends. As it is, they are actually the funeral fund, so hopefully they won't be required for a while, and when they are they might even be back in profit!

The New Forest beckons. Have a great weekend every one.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 239
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: Here goes

Post by silmcoach »

Right, have placed sell orders on the 3 funds in the ISA. Part of me thinks stupid, given that the ex-dividend dates are 1st and 6th June. That's next Monday and the following Sunday.

But, I'm up 4% and could be 5% by today's valuations. This is classic hang-on-to-winnings stuff. It's a gamble to hold out until the ex-dividend dates for the sake of an extra 1%. I'm very happy 😀 to take 4-5% gambling just £300. That means on the£1K invested I should be up 1.5% in a couple of weeks. Certainly beats 0.01% p.a. in the Cash ISA.

My reasoning is that the markets are being moved solely by sentiment, and the fracca over the Huawei extradition case does not bode well for US/China trade relations, hence neither the markets.

We shall see how the next few days play out.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 239
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: sell orders paid off, phew.

Post by silmcoach »

So, the markets did turn negative yesterday after the FTSE 12 noon and Dow 3 p.m. (UK times) valuation points. The European markets (incl. UK) continue to slide today by over 1% this morning which would have wiped out any dividend gain had I not sold (unless of course the markets rise again on Monday).

For me, the lesson learned is that market volatility is such that dividends should be ignored, unless of course a fund is seriously in the red and selling would realize a significant paper loss. In that case, any dividend is a consolation while holding on to funds until such times as the markets recover.

The above refers to the ISA which is really my instant access cash savings account. Having made 5.42% on £300 in 10 days I have effectively received a reasonable interest rate of £1.67% p.a. on the £1K in the account should that cash sit there for a year, available to be withdrawn at any time tax free.

Now as far as the SIPP is concerned, I was tempted to sell all my funds in profit to realize the gains, but I didn't, thought I would hold on for the dividends. But the same applies as with the ISA, I could have sold and bought back in again when the markets fall, as in fact they are already doing. Not sure why I didn't. Perhaps I wasn't totally confident in my anticipation that the markets would fall. If I am to adopt this new strategy of "in-out" then I need to be certain in my own mind.

The fact is there's a lot of money being borrowed by governments to support the furloughing of employees. Yet still there is rising unemployment as companies cost-cut, or even go bust. I think we are going to see an L-shaped recession/depression. My personal view is that markets yo-yo because of the human survival instinct. A belief that things will be alright and that the economy will soon recover must underpin that instinct. But it's natural to have doubts, moments of despair. It's those swings in sentiment that drive the markets up and down. It's got nothing to do with economic fundamentals, other than money is cheap to borrow, and if you have it, there's no where else to invest it.

I can best describe my new strategy as "market surfing". I need to catch the roll of the big waves and (don't know the surfing term) bow out (sell) when they begin to break.
silmcoach
Greatest wealth - happy heart, peace of mind :D

Post Reply